The 5Cs of Credit Analysis every SME must Know
The assessment of the creditworthiness of a business primarily depends in its capability to pay back its loans. However, this isn't the only consideration that determines the probability of your company being approved for a loan. As business owner of an SME, it is important that you are made aware of the most crucial elements in a business loan application. Lending institutions carefully take the following 5 elements into account to comply with their own credit risk management processes. After all, they need to be assured that the loans they approve will be profitable for them, i.e. no loan defaults.
Character
A lender's opinion of a borrower's general trustworthiness, credibility, and personality.
"Willingness to pay" and reputation are factors that banks consider whenever a firm or business is in the process of obtaining a business loan. Loan financiers will also ensure you and any involved business partners have upstanding character, including how you've managed your business' credit history previously and even possibly how you managed your own personal credit.
Capacity
To determine ability to repay the loan
The success of each credit application is largely based on the capacity of the business/borrower to pay it back. This capacity to repay is assessed based on the source of the applicant’s repayment of its loans with the lending organization.
To ensure that the business is viable for a loan, the cash flow of the business is evaluated so as to understand the extent to which the operating expenses, as well as the loan payments, are sufficiently covered by cash generated from the business.
Capital
The amount of money invested by the business owner
Banks and potential lenders determine how much equity was invested into the business operations by its shareholders. Lenders want to be sure that you and other shareholders are committed to the sustainability and growth of the business. Proof that investors are risking their own money into the business and have some "skin in the game" -before going to the debt market for loans- speaks a lot about the owners' commitment to the business.
Collateral
Assets that can be pledged as a security
Collateral is a significant consideration when it comes to the credit approval process. After analyzing certain aspects of your loan application, lenders make sure that in case of a failure to repay the loan, the bank or the lending institution has a second way out in recovering the loan it extended to the business. The items that can be pledged as collateral include assets such as real property, capital assets, movable assets such machinery and equipment, etc. equivalent to or greater than the value of the loan applied for.
Conditions
How the business will use the loan and how that could be affected by economic or industry factors.
To get shortlisted for the succeeding stages of credit approval, lenders must understand the present financial standing of the organization, its future growth prospects, any possible adverse conditions in the industry, foreign exchange risks, changes in government policies, and the like. While evaluating the creditworthiness of a firm, the lending organization considers the industrial ecosphere within which the business operates.
This helps the lending institution assess the purpose of the business loan being applied for and how it will be used within the dynamic context of the greater industry where the business is part of.
CreditBPO, your financial technology partner, will pave the way to assisting your business to improve your business credit rating at a very affordable cost. The CreditBPO Rating Report will give you a concise and accurate picture of your business’ creditworthiness along with key recommendations to improve financial performance and creditworthiness.
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